Should You Sell Future Land Development Holdings Limited (HKG:1030) At This PE Ratio?
Future Land Development Holdings Limited (SEHK:1030) is trading with a trailing P/E of 8x, which is higher than the industry average of 7.3x. While this makes 1030 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Future Land Development Holdings
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for 1030
Price-Earnings Ratio = Price per share ÷ Earnings per share
1030 Price-Earnings Ratio = CN¥5.34 ÷ CN¥0.671 = 8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 1030, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 8x, 1030’s P/E is higher than its industry peers (7.3x). This implies that investors are overvaluing each dollar of 1030’s earnings. Therefore, according to this analysis, 1030 is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your 1030 shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to 1030. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with 1030, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing 1030 to are fairly valued by the market. If this does not hold, there is a possibility that 1030’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in 1030. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for 1030’s future growth? Take a look at our free research report of analyst consensus for 1030’s outlook.
Past Track Record: Has 1030 been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of 1030’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
